Gifts that are received with donor restrictions must be applied according to the donors’ wishes. Council, or some official subset thereof, must decide if gifts that contain use and/or time restrictions fit within appropriate church programming.
Key steps and issues include:
- Recording designated gifts and grants—those with a particular use and/or time constraint—in special temporarily restricted equity accounts that indicate the restriction, such as "Temporarily Restricted for Family Workshops." This may be accomplished by debiting the Unrestricted Net Asset account and crediting the Temporarily Restricted account for the amount of the gift(s).
- Placing the funds in a separate bank account is not necessary (but the unspent balance needs to be tracked, of course).
- Budgeting for the spend-down of the restricted funds, if a budget does not exist already, indicating authorized expenditures for the program, and the time period(s) over which the funds may be spent. Programs often extend for more than one year.
- Creating the general ledger expense accounts that are needed to track the budget and expenditures.
- Adjusting the Temporarily Restricted account at the end of each accounting period. As funds are expended for the program, per the donor restrictions and the budget plan, relieve the Temporarily Restricted account by doing the reverse of 1) above in crediting the Unrestricted Net Asset account and debiting the Temporarily Restricted account. At the end of each accounting period, determine the amount spent on the program during that period.
Although uncommon, sometimes large designated gifts are given with the proviso that interest earned be retained for use in the designated program. Either an allocation of interest earned on all church funds will have to be prorated and allocated to the program, or a separate bank account could be set up for the designated funds (do not do the latter unless absolutely necessary). Allocated interest gets added to the Temporarily Restricted Net Asset account.